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Beacon

At the Silicon Valley Comes to Cambridge event, one or two speakers said to packed audiences, ‘you don’t need a business plan, you don’t even need a business model.’ I winced, knowing that for the next 6 months (or however long it takes the current bubble to burst) I will be receiving a string of funding proposals consisting of no more than a gnomic diagram on a Powerpoint slide.

The reasoning from the Silicon Valley investors appears to be that you first have to build scale, then when you have an audience you can find a way of monetising it. The often-referenced example is Google, which in the early days (from 1999) was simply a highly-successful search engine whose reputation spread by word of mouth. Only later on (2003 onwards) did Google introduce successful revenue-generating services such as AdWords (targeted and pay-per-click advertising) and AdSense (placing targeted advertisements).

So successful was the strategy that in 2006 it generated total advertising revenues of $10,492,628,000 and net profits of $3,077,446,000. No wonder the pundits were tempted to say, ‘build it and they will come’ and no wonder that Facebook sought its own equivalent of AdWords.

Hence the introduction of Beacon in November 2007. The story is widely known, but a short summary for the record may be helpful. Beacon introduced a new advertising system by expanding Facebook’s data collection and reporting beyond Facebook’s own platform. Participating ‘partner’ sites such as Amazon, eBay, Epicurious or the New York Times would have been able to add some lines of code to their website which would act as an extension of Facebook’s own surveillance system.

As originally conceived, if you as a Facebook user had undertaken activity on a ‘partner’ website (such as buying a book on Amazon) Facebook would record that activity AND your Facebook connections would also be informed of your purchases or actions.

So your Facebook friends will be notified of your activity, as will Facebook itself and Facebook’s advertising ‘partners’ The initial list of advertising ‘partners’ included 44 major coprporations such as Coca-Cola, Sony, Verizon, Comcast, eBay and Blockbuster.

It’s Not What I Say, It’s What You Hear

Now, you COULD make a case for saying that Beacon as originally proposed wasn’t really so bad. After all, websitse are collecting information about you all the time and arguably Facebook was simply being more upfront than others about it. Remember, for instance, that when Google launched Gmail it included a facility skimming emails for keywords so that targeted advertising could be delivered. This met with huge consumer pushback and soon Google introduced a simple (yes/no) opt-out feature. And since we have this information on you already, where’s the problem? is the underlying rationale….

But this ignores the extent to which in marketing as in politics perception is nine-tenths of reality. Users – especially Gen-Y users - don’t like to be reminded that they are surfing a ‘free’ service not on their own terms but as potential serfs of search marketing behemoths. So Mark Zuckerberg may well have tried to sell Beacon to the Facebook masses as a service, but what they heard was, ‘you’ve been suckered, helots’.

If you want a Silicon Valley insider’s view of the whole Beacon debacle, I urge you to read Kara Swisher’s account in BoomTown; she has consistently been the shrewdest critic of Facebook.

Adult Supervision

The pushback from Beacon was ferocious, so much so that Facebook had to change the privacy settings (basically from ‘opt out’ to ‘opt in’ for using Beacon) and Zuckergerg issued an apologetic blog. It remains to be seen whether an ‘opt out’ Beacon is still of fundamental interest to advertising ‘partners’ (Coca Cola and Overstock have pulled out) and whether the consensus among ordinary users is forgiving (just as Google was largely forgiven for Gmail’s ‘snooping’).

It is not at all clear that Facebook has learned its lesson, though. Just before Zuckerberg posted his apologetic blog, PC World revealed that ‘Facebook's controversial Beacon service tracks activities from all users in third-party partner sites, including people who never signed up with Facebook or who have deactivated their accounts’.

Either way, the question remains: without a Beacon-type product, can Facebook find a suitably efficient, mechanistic way of monetising the enormous ‘community’ it has built up over the mere four years that it has been around?

Perhaps Beacon and other failures of judgement are merely the shortcomings of inexperience. After all, it was arguably only after Google took on the seasoned and shrewd Dr Eric Schmidt as Chairman in 2001 that the founding team of Sergey Brin and Larry Page started moving towards a public company mindset, with a concern for corporate governance and the development of a business model.

My last word for the time being on this is: never, ever put the techie guys anywhere near a customer-facing activity. The big shortcoming of Ben Elton’s Blind Faith was its implicit assumption that people are all about reason: they are not. The techie guys live in the ultimate world of reason – binary code –and customers do not.

Litigation

Meanwhile, back in Massachusetts where the Facebook story began, a legal action has been ticking away for quite some time now. Since it is complex and still before the courts, read the excellent, detailed article in 02138 magazine – so called because that is the dialling code for Harvard.

Put simply, some former colleagues of Mark Zuckerberg’s at Harvard claim that he stole their idea (which may not be legally protected) and/or their source code (which may be well protected). If and when the case receives a full hearing, it is likely that the plaintiffs will prefer damages to closing down Facebook.

Do As I Say, Not As I do

Once the article was published, Facebook took legal action against 01238 magazine to take down from its website court documents about Facebook’s origins and about Mark Zuckerberg’s time at Harvard.

A fuller account can be read here. But in summary, I think I’m detecting a pattern, not just about commercial ethics but about attitudes to privacy: privacy still matters, no matter who you are, and it’s probably only when we think no one is ‘really’ watching that we act as if privacy did not matter. Once I remind you that the curtains are open, you’re quite likely to close them – even if you’re just sitting at home reading a book. Either that, or you'll call the police and tell them I’m a snooper.

This was true in Blind Faith and I thinks it’s true for social networking business models, too.

Microsoft Invests

Is Facebook worth litigating about? After all, if it is simply a fast-growing social networking site, that per se is unlikely to butter many parsnips and runs the risk in any event of being overtaken by the next new thing.

But the investment community around Palo Alto was set alight by the news in October that Microsoft had beaten Google and Yahoo! to the punch by taking a 1.6% stake in FaceBook for $240m, giving the entire company a notional value of $15bn. Since Mark Zuckerberg personally still owns 20% of the company, his paper wealth went up to $3bn in one go.

Up to that point, the company had been funded by an angel investment from Peter Thiel, one of the founders of PayPal, in late 2004 and a venture round in May 2005 from Palo Alto-based Accel Partners. Otherwise, the income generated from advertising or selling gifts that one FaceBook member may give to another is minimal. Accel’s $12.7m investment could now be revalued at £1.65bn. If Accel turns this into an exit, it has ‘made’ the fund with one investment.

Business Model

Let me finally bring this to a close by asking whether Ben Elton really did tell us something useful about social networking and what lessons – if any – we can extract form the Facebook soap opera.

First, I do not believe that there is any one ‘right’ way of starting and running a social networking site, but looking at how FaceBook has developed and comparing it with some of the ideas I have seen pitched around Cambridge in the past year, I can begin to see some of the critical elements at least for what will and won’t fly.

Going back to the question of business plans and business models, I can see why the Silicon Valley speakers at the Cambridge seminar said don’t worry about a plan or a model – at least, I think they meant they preferred to look at proposals that are already generating traffic rather than the standard MBA-written confection, with 25 pages of market data from the library and financial projections that produce a regular J-curve.

But, secondly, the example of Google is the exception rather than the rule. It took Google several years of its relatively short existence to work out a basic business model and a means of monetising – advertising – the ‘community’ it had grown through its superior search engine.

Thirdly, Google unlike Facebook pretty soon recruited experienced senior management in the form of Eric Schmidt to act as chairman. Governance improved and a market focus was developed. AND Google is pretty much a one off. For the rest of us, Aristotelian logic still applies: generating traffic is a necessary but not a sufficient condition of commercial success.

Fourthly, the real success stories of the web have either been non-profit like Wikipedia OR have found a way of giving consumers a genuine value-add (often Long Tail related: think of Amazon or of iTunes).

Or they have been a ‘momentum play’. This is just possibly a euphemism for the ‘greater fool’ theory of investment: a large firm, such as an ‘old media’ company recognises that it needs to move into the brave new world of Web 2.0 and is unlikely to do so on its own. So it finds a firm that happens to be top of the pops that month, pays an outlandish valuation for a significant stake and then seeks to justify it on the grounds of synergy or blocking the competition.

This reminds uncomfortably of the 3G telecoms licence auctions and could well become the winner’s curse: my main motivation for bidding too much for a licence is to make sure you don’t get one.

Fifthly, of course there are many internet-based businesses and social networking sites out there. But the survivors have to have something compelling about them: I’ve seen too many business proposals for firms seeking to become the ‘MySpace for accountants’ or the ‘LinkedIn of doctors’ to believe otherwise. Why you? And even if you can answer that question rationally, can you be sure that the Gen-Y dogs will eat your dog food rather than the identical dog food from your rival that got started earlier or had nicer packaging or simply lucked out. This is a fickle market and the caravan moves on.

There are a couple of perhaps more equivocal points. For instance, I think it is significant that Facebook moved to Palo Alto: even if you run a global networking site with users in 50 countries, there is still some advantage in locating your head office in one of the leading clusters for your sector (if your focus was on media, you might prefer London or New York). But relocation may not be essential.

There is a likely to be an important difference in practice between community sites (where content is user-generated around a theme of mutual interest) and social networking sites, where the content is the activities of the members. Some commercial sites, such as Amazon, are close to community plays in that content added by users (reviews, rankings) in the best cases really does make use of the ‘wisdom of crowds’ around specific areas of expertise.

Finally, privacy still matters, as Ben Elton noted. What Facebook overlooked with Beacon is not just Gen-Y’s sense that it operates on its own terms, on the internet as elsewhere; it also overlooked that most of us most of the time are only lax about privacy when we think no-one is looking or it does not matter.

And on that last point, to follow Hugh Greene’s example in refusing to let the devil have all the best tunes, rather than whistle the Horst Wessel Lied all I shall say is: way to go.

Oh, and best wishes for your social networking start-up in 2008.

24 December 07

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